Tax Consolidation Refresher Part 2: Allocable Cost Amount (ACA)
In the second edition of our tax consolidation refreshers we consider the Allocable Cost Amount (ACA) process. In essence the ACA process is designed to replicate the accounting fair value approach and remove certain anomalies that would otherwise arise when determining whether to acquire a business (i.e. assets) or a company. The ACA process resets the tax value of all of the assets of entities joining a tax consolidated group and therefore inherently provides risks and opportunities.
The ACA process essentially provides a deduction for part of the purchase price by allocating value (refer below) against the underlying assets in accordance with their market value. Therefore, valuation of assets becomes a vital factor in the ACA process and presents the Commissioner with a simple area to query. It is important to understand the value of the underlying assets otherwise value may be incorrectly allocated. For example, a common pitfall is to assume that all of the consideration in excess of the Net Asset value of a company resides in goodwill. Adopting such an approach means that ACA may be allocated to goodwill and away from assets such as stock and/or fixed assets resulting in a higher income tax liability.
A simplified ACA process arises when an entity exits a tax consolidated group, essentially reversing the entry process and using the tax value of the entities assets as the starting point. Significantly, capital gains can still arise even if no proceeds are received on an exit and therefore careful planning is required.
Excess or deficit of ACA can result in capital gains tax events on entry and/or exit without cash to pay the tax liability!
Put simply, the ACA process is a series of steps to determine the ACA amount. The ACA amount includes amounts attributable to items such as the cost of membership, certain accounting liabilities and pre consolidation & pre acquisition losses.
The ACA amount is spread over the assets of the company in a two step process. Firstly it is applied to Retained Cost Base assets (i.e. assets such as cash and Australian Dollar receivables). The balance is then allocated to the Reset Cost Base assets. It is in this step that often the pitfalls / opportunities arise as a number of caps and limitations exist in relation to certain subsets of the Reset Cost Base assets.
Importantly, the allocation of the ACA amount across the Reset Cost Base assets is undertaken (subject to certain limitations) using market valuations. Accordingly, the process may result in the tax cost allocated to certain assets (e.g. stock) being higher than book value. Such a result could be beneficial from a tax perspective, however this is dependent on a number of factors.
Understanding the complexity of the tax consolidation law and its interaction with market valuations is fundamental in not only meeting your compliance obligations but also maximizing the opportunities available.
Should you have any queries regarding this matter please contact your relevant ESV engagement partner on 9283 1666.
Article by David Prichard